Kukla's Korner Hockey

Assuming risk moving forward

There's been a lot of talk about how close the two sides are financially but there's a major hurdle that needs to be addressed in the NHLPA's last offer. The line that says this: "There are no guarantees or fixed targets, other than a requirement that, beginning with the second year of the Agreement, players' share, expressed in dollars, may not fall below its value for the prior season." In English? In Years 2-5 of the players' offer, the number they make in the second year is the bottom line. Their cut of the revenue won't go below it.

"What they're saying is, 'We're not willing to absorb any risk," said one NHL source.

During the last CBA, revenues grew at record rates, so a clause like this wouldn't have mattered. But there's a growing belief that it may take a few years to recover from the damage of this lockout and the locked out players don't believe they should pay the price. The sooner a deal is reached, the less of an issue this becomes.

"If this thing settles in the next two weeks, they've put a lid on it," said an agent.

But if the lockout drags on beyond that, it's perfectly reasonable to predict that revenues dip in the coming years. If that's the case, and the players negotiate a floor in which their cut of the revenue can't go any lower, it's no longer a 50/50 deal. They'd get more than 50 percent of the revenue.

"My own personal belief is that it's going to take two or three years to dig out of this," said another prominent agent on Monday. "The fans are totally fed up with this. If it takes them two or three years to dig out of this, I'm not sure why the players should pay the price."

A reasonable mediator suggestion: This is a tough one. The players didn't have this kind of protection during the last CBA and it worked out just fine for them. If the two sides are going to return to a partnership, one side can't assume all the risk. Perhaps limiting a potential loss in revenue for the players to a certain percentage each year, early on in this CBA would be fair. But after three seasons, when the game has recovered, lift all restrictions.

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Comments

I don’t see it the same way. This league is damaging their own brand (to steal from Ryan Miller). Why should the players absorb the damage inflicted by the league? This is a sports league. It’s one of the closest things to a “sure thing” as you’ll get in business, as long as it is run with competence. If they players were subverting the league and somehow damaging the league, it would make sense for them to “share the risk.” However, even questioning the integrity of bad officiating lands massive fines on players. This isn’t a situation where the pain should be shared. Not after the third lockout in as many contract expirations.

I don’t see it the same way. This league is damaging their own brand (to steal from Ryan Miller).

Posted by redxblack from Akron Ohio on 11/27/12 at 01:52 PM ET

This clause is being branded as something to avoid damage, but one like it was in the PA’s offer before there was damage. A clause like this would be rejected no matter what the circumstances with “brand damage” were (and previous to this clause, Fehr’s “ask” was even more radical).

Think of it this way:

A normal business sets budget projections for the next year. Salaries, bonuses and new hires are all negotiated based on these projections. If the projections are met, everything’s gravy. If the projections are not met, the business needs to reduce expenses to be in line with the revenue actuals. This is done through a variety of cost-cutting measures (bonuses are canceled or rolled back, dividend payouts are reduced, layoffs may occur, incentives are given for early retirement).

As long as there are guaranteed contracts, not one of these mechanisms are available to the NHL.

So, in lieu of attacking guaranteed contracts and trying to implement the above cost-controlling measures, the NHL braintrust came up with escrow. Escrow’s a mechanism that automatically ensures costs and revenues never get out of synch with one another by turning player contracts into estimates, instead of actuals, just like the revenues, and reconciling it all at the beginning of the next season when last season’s final accounting is done.

This is something the NHL simply cannot give up, whether the brand has been damaged or not. It’s an existential thing. If the Western economy goes into a great depression in January, the NHL dies under Fehr’s offer (and, incidentally, if any player gets paid ever, it will be pennies on the dollar over a series of years), whether there was a lockout this fall or not.

Absent this clause, it probably survives. Both entities take huge haircuts (though not starting at the throat, as would happen if the clause stayed).

Actually, if the economy collapses in Jan or next Jan if the lockout endures, it simply sets the floor very low. This is a move by the PA to disincentivise future lockouts.

The NHL has such a product it’s about as sure of a thing as someone walking into a cathouse with 10 $100 bills stuffed in his fly. This is a symbolic gesture to try to stop the next lockout. As long as lockouts work for the league, this will become a cycle.

Actually, if the economy collapses in Jan or next Jan if the lockout endures, it simply sets the floor very low.

Not under any PA offer, it doesn’t. Imagine the lockout ends, and the players get a prorated 1.8 billion. Over the summer,, prospective customers discretionary income drops to next to nothing due to global financial meltdown. Hockey related revenues for the next season are projected at $1.5 billion.

Does the PA get 50% of this number? Nope. They get 1.8 billion, which comes out to about 115% of HRR. It’s doubtful the league could pay that, most teams declare bankruptcy, there’s no more league for a while and nobody gets paid much of anything in the long run as settlements are made over a long period of time for a fraction of the initial value.

While this scenario is highly unlikely, it’s possible enough that a business like the NHL can’t sign something like this or risk becoming one of those dead airlines that used to guarantee baggage handlers 80k and pilots 500k when they wouldn’t have been able to sustain half that.

And this clause has nothing to do with “damages.” It’s been in every framework Fehr proposed as Executive Director (including those from prior to any lockout). Before damages started to manifest, it was actually more radical than it is now.